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Make Millions in Tech

A little homework goes a long way.

Silicon Valley is its own world ("the Valley"), with its own language (geekspeak), and its own commerce (ludicrous options grants). That's why many people I know would rather be forced to eat a gallon of soup with a fork than invest in tech stocks.

But forsaking all tech stocks can be a recipe for subpar returns. Consider Cisco Systems. This tech pioneer, which specializes in the once-esoteric business of networking equipment, delivered mind-blowing returns for early investors, despite the tech crash. You could have become one of them by doing a little extra homework.

Yes, you could haveWhat homework? Trade magazines such as Network World were a great source of information when tech investments were taking off. Had you been a reader in 1994, you would have learned that Cisco products were helping build the digital communications backbone of the Canadian government. In 1996, you would have learned that Ryder was depending on an advanced, Cisco-powered network to keep its fleet of trucks in top working condition. And in 1997, you would have learned that Cisco employees loved their jobs so much that they were happily putting in 60 hours or more per week building the latest routers.

At the same time, had you checked Cisco's annual reports, you would have seen outrageous sales growth:

Year

Total Sales (Billions)

Year-Over-Year Growth

1994

$1.334

--

1995

$2.232

67.3%

1996

$4.096

83.5%

1997

$6.452

57.5%

Source: Capital IQ

Investors who seized the momentum in 1994 have seen their original investments increase more than nine times in value. But those who waited till January 1997 are sitting on a better-than-225% gain today, which is more than double the market's return over the same time frame.

What about today?It's tempting to say that the dot-com bubble was a unique time of massive growth, and that those days are gone, never to return. But I think that's crazy. Plenty of great tech stocks are available today, and some even look like Cisco did in 1995.

How to find them? Try the same trade magazines that worked back in the day. You're looking for technologies on which corporate chief information officers (CIOs) are willing to spend big money. A quick search of "spending priorities" in the 2006 archives at informationweek.com brought forth this article, which suggests that disaster-recovery technology is still in demand, which could be a boon for data-storage providers.

Screening for opportunities in this industry isn't too difficult. Here's a list of candidates ranked by three-year sales growth:

One or more of these stocks could become Rule Breakers. Take LaserCard, for example. While its biometric ID technology isn't exactly a first line of defense for data disaster recovery, its data storage technology, currently used in identification technology, could have dozens of other potential uses for the technology.

Of course, widespread adoption is by no means assured, as witnessed by the divisive debate over national ID cards. There's also no guarantee that LaserCard will ever live up to the hype surrounding the stock. Nevertheless, LaserCard's forward P/E of 20.5 doesn't seem overly out of whack.

Make millions in techLearning about the information technology industry isn't easy, but the rewards of study can be huge. That's why we devote significant time and energy searching for those opportunities at our Motley Fool Rule Breakers growth-stock newsletter service. We think hunting for the next big technological breakthroughs will lead to the highest possible returns.

If you'd like to join us at Rule Breakers, we offer a free 30-day trial. Take us up on our offer, and you'll have free access to all our picks and research, with no obligation to subscribe, for a full month. Click here for more information.

This article was originally published on July 15, 2006. It has been updated.

Fool contributor Tim Beyers only breaks the rules in his portfolio. Wimp. Tim owns shares of Seagate. Get the skinny on all of Tim's stock holdings by checking his Fool profile. The Motley Fool's disclosure policy is a rebel on Wall Street.

Author

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment. Find him online at timbeyers.me or send email to tbeyers@foolcontractors.com. For more insights, follow Tim on Twitter.